ICICI shops in Tokyo for lower costs after dim sum

ICICI Bank is slicing borrowing costs by almost 3 percentage points as it shops around for lower interest rates across Asia. Photo: Bloomberg

Tokyo/Mumbai: ICICI Bank Ltd, which is applying to sell bonds in Japanese yen less than a month after an issue in yuan, is slicing borrowing costs by almost 3 percentage points as it shops around for lower interest rates across Asia.

The country’s second-largest lender by assets, which plans to open branches in Australia and Mauritius, registered to sell as much as 50 billion yen ($505 million) of notes on the Tokyo Pro-Bond Market and has until next June to do so. It sold 650 million yuan ($106 million) of Dim Sum securities due 2016 on 18 June in Hong Kong at 4%, 283 basis points less than its weighted averaged fixed coupon.

“Even in the most volatile conditions, we have raised funds,” chief executive officer Chanda Kochhar said at the company’s annual general meeting last week. “We always look for a window of opportunity, where liquidity is available at the appropriate cost. We go ahead and raise those funds.”

Kochhar is raising funds outside of India as she plots expansion, including upgrading the lender’s representative offices in China and South Africa to full branches. Reserve Bank of India governor D. Subbarao kept the repurchase rate at 7.25% on 17 June, more than double China’s one-year deposit rate of 3% and similar rates near zero in Japan.

Diversifying funding

“The lowest cost of funds on a fully hedged basis is luring borrowers to Tokyo,” Vishal Narnolia, a Mumbai-based banking analyst at SMC Global Securities Ltd said. Shopping around for interest rate arbitrage opportunities may help ICICI to widen its own lending margins in the September quarter.

The bank increased margins to 3.11% in the year ended 31 March from 2.73% the year prior, it said in a 26 April filing. Net interest margins, the difference between earnings on loans and the cost of funding, at Indian lenders narrowed by 10 basis points to 3% in the 12 months to 31 March, central bank data show.

ICICI had 10 foreign branches as of 31 March, the most among private sector banks in India, according to RBI data. It also has three subsidiaries and eight representative offices located in different countries. Sujit Ganguli, a Mumbai-based spokesman for ICICI, declined to comment on the bank’s fundraising plans, citing company policy.

The bank plans to sell the two-year yen bonds as part of its strategy to diversify its funding sources and investor base, and cut borrowing costs, according to a person familiar with the matter. The money it raises offshore will be swapped into US dollars and fully hedged, that person said on 25 June, asking not to be identified because the details are private. Selling yen bonds will result in a cost saving of about 2.5 percentage points, the person said.

Shopping around

ICICI sold Singapore dollar-denominated bonds in January. The S$225 million ($178 million) of 3.65% notes due 2020, sold at par, were trading at 96.68 cents on the dollar on 28 June and yielding 4.24%, Bloomberg-compiled prices show.

It issued 100 million Swiss franc ($106 million) of 2.75% debentures in December which also mature in 2020, according to data compiled by Bloomberg. Those notes are yielding 3.967% versus a weighted average fixed coupon of 9.06% on its rupee-denominated bonds and 5.17% on its US dollar-denominated debt, the data show.

Global investors have pulled $7.4 billion from Indian bonds and equities last month, weakening the rupee and increasing borrowers’ need to hedge currency risk. The rupee slumped 8.6% last quarter, the most among 11 Asian currencies tracked by Bloomberg. It touched an all-time low of 60.765 per dollar on 26 June and rallied 1.4% on 28 June to 59.39.

Currency risk

Risk arbitrage isn’t the driving purpose of overseas borrowing by Indian banks, said Saswata Guha, a Mumbai-based director at Fitch Ratings India Pvt. Ltd. Banks are expected to fully hedge these funds and so risks or downsides on account of this foreign-exchange exposure is quite limited.

The cost of insuring the debt of ICICI Bank using five-year credit-default swaps has fallen 153 basis points over the past 12 months to 280 as of 27 June, according to data provider CMA. Swaps allow investors to insure debt against default and traders use them to speculate on credit quality. Contracts on State Bank of India, also considered a proxy for the sovereign, have fallen 122 basis points over the past 12 months to 260, CMA data show.

Barclays Plc and Mizuho Financial Group Inc. have been hired to manage the yen bond sale, another person familiar with the matter said on 19 June.

Investor resistance

The Tokyo Pro-Bond market is a relatively new bond market for professional investors which was established under a 2008 revision to Japan’s Financial Instruments and Exchange Act.

It allows for flexible and timely sales by streamlining procedures and simplifying disclosure, according to information on the Tokyo Stock Exchange website. Documents can be either in English or Japanese, whereas existing Samurai bond issuers are required to disclose in the local language. Japanese, international or US accounting standards can be used.

ICICI may face some investor resistance to its yen notes, according to Hiroaki Hayashi, who manages 1.6 trillion yen of fixed-income investments at Fukokushinrai Life Insurance Co.

The Tokyo Pro-Bond market hasn’t really been that active, Tokyo-based Hayashi said. For issuers, the costs are low but investors still want to get economical returns.

Unfamiliarity with Indian names may also prove a stumbling block, Hayashi said.

Investing in bonds is all about getting interest and the principal repaid, he said. “I bought some Korean paper and they had a currency crisis but I can imagine what’s going on there. By contrast, I don’t know what’s going to happen in India. I can’t trust emerging economies.”